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Market strong, but bad news lurking

Lucy Battersby

FRESH economic data suggests Australia may have beaten the odds and avoided a technical recession in the first three months of this year, with the help of a trade surplus, strong building approvals and rising rural commodity prices.

But economists say a recession later this year is unavoidable.

The sharemarket closed 1.6 per cent higher on the news but was also buoyed by a strong performance on Wall Street overnight.

The Reserve Bank board's decision to leave the target cash rate at 3 per cent was largely anticipated, but RBA governor Glenn Stevens noted that business investment was declining and suggested that rate cuts might be needed later in the year to boost economic activity.

The sharemarket reached its highest intraday level since November, and closed at its highest for the year at 3955.3 points, a level last reached on October 24.

The materials index, dominated by mining companies, rose by 2.6 per cent following a rise in global commodity prices based on strong manufacturing data from the US and China.

BHP closed 96¢, or 2.6 per cent, higher at $36.70 a share, and Rio Tinto jumped $2.67, or 4 per cent, to $69.

ANZ wrote in a note to clients that the current account deficit for the March quarter was better than expected, narrowing by just under $1.7 billion to $4.6 billion, or 1.5 per cent of gross domestic product.

"This result was driven primarily by a huge trade surplus in the quarter of $5.1 billion, an improvement of $900 million, the largest trade surplus since records began in 1959," ANZ said.

But there is bad news lurking beneath the good figures. JPMorgan chief economist Stephen Walters said that even though GDP had not fallen in the March quarter, conditions were recessionary.

"Unemployment is rising, firms are slashing investment, confidence is fragile, and the Government is spending its treasure more quickly than at any time since the 1970s," he said.

Another member of JPMorgan's economic team, Helen Kevans, said: "What we actually saw was a massive slump in imports and that is what is allowing exports to make a positive contribution to growth in the first quarter."